A flexible spending account (FSA) is a beneficial tool for saving money on health care, since the account contains pretax dollars contributed each pay period to pay for qualified medical and dental expenses.
An important provision of an FSA is that most of the money contributed within a calendar year must be spent within the same year or it is lost. Such urgency is no longer necessary thanks to rule changes by the Internal Revenue Service (IRS). First, employers have the option to offer up to 14 and ½ months to use the funds. Many employers are taking advantage of this extension to the use-it-or-lose-it provision, allowing employees to spend money from their FSA until March 15. Secondly, employers also have the option of allowing employees to carry over up to $500 of unused funds from one year to the next. In addition, any amount that is carried over does not count toward the maximum contribution limit.
So how much should you put aside?
Because an FSA is such a beneficial money-saving tool, it is natural to want to make the most of the tax advantage. However, putting too much money in the fund may not benefit you if you have to spend it on unnecessary expenses or fail to spend the money at all. The trick is to allocate an appropriate amount to your FSA in the first place. Look at your expenses from the last few years and determine what your average out-of-pocket medical expenses have been. Also consider if the following year will bring any big life changes such as a marriage, divorce, a new baby or changed dependent status.